Pound Sterling falls vulnerable to some profit-taking

• Pound Sterling (GBP) forecast for near-term upside as Britain’s economic outlook brightens
• British pound to euro (GBP/EUR) pair riding bearish momentum
• Pound Sterling (GBP) heads lower against the US dollar (USD) despite the UK government’s reopening plans
• Risk-on market sentiment supporting the Australian dollar (AUD), but downside risks remain

Pound Sterling (GBP) initially attempted to extend its Bank Holiday rally on Tuesday but pared gains in the European session, after falling succumb to some profit-taking.

The British pound (GBP) surged near 14-month highs against the euro (EUR) and reclaimed losses against the resurgent greenback on Monday, in the wake of a statement from UK Prime Minister Boris Johnson, who gave the green light on the next round of easing lockdown measures as part of his roadmap exit plan.

An upgrade to finalised Q4 UK gross domestic product (GDP) data has also driven pound Sterling (GBP) higher against currency rivals over the past week by stoking hopes for a swift economic rebound in Britain.

The UK currency saw a pick-up in net longs following the British Prime Minister’s announcement, and while adjusted for open interest, GBP remains the largest long.

However, this leaves the currency vulnerable to significant pullbacks. The euro to British pound (EUR/GBP) exchange rate appears to be the preferred avenue for upside when GBP weakness is intact.

GBP/EUR plummets in foreign exchange (FX) markets

Despite signs of Europe’s third COVID wave threatening to overwhelm hospitals across the bloc, the euro (EUR) is gaining traction against other major currencies, including the British pound (EUR) and US dollar (USD).

Rising COVID-19 cases in the Eurozone and the EU’s laggard vaccine rollout have been a factor of euro (EUR) weakness over the past few months. Many European countries have already reinstated or extended lockdown restrictions to curb the spreading of the virus.

France and Italy have become the latest EU member states to reimpose stringent lockdown restrictions amid an exponential increase in daily COVID-19 cases.

Europe’s deteriorating coronavirus situation has caused many investors to become increasingly concerned about the Eurozone’s recovery outlook, which against the UK’s brightening prospects has weighed on EUR/GBP.

However, today’s economic data out of the Eurozone has pushed the single currency higher in foreign exchange (FX) markets, and the British pound to euro (GBP/EUR) exchange rate is trading 0.5% lower at EUR 1.17.

Eurozone Sentix Investor Confidence jumped to 13.1 in April, beating consensus forecasts for a rise to 6.7. At the same time, the Current Situation Index advanced to -6.5 from -19.3, the highest level recorded since February 2020 – before the pandemic gripped the EU.

Investor confidence has been boosted by reports that the EU’s vaccine rollout is accelerating, supporting the bloc’s recovery outlook. While inflationary risks are expected to exert pressure for the coming months, hopes for a robust economic rebound are also supported by the EU’s massive fiscal policy.

Still, given that the number of COVID-19 cases, hospitalisations and deaths in Britain are near multi-month lows and the UK is on track to reopen the economy by June 21st, there is more reason to be cheerful about pound Sterling (GBP).

COVID-19 developments will remain a prime focus for GBP and EUR traders this week. While an uptick in the EU’s vaccine rollout could continue to aid the single currency higher, concerns over lockdown extensions should ensure EUR remains weak against pound Sterling (GBP) and other peers.

Robust US economic data could also see the euro (EUR) shed gains against the US dollar (USD), which is poised to benefit from diverging fundamentals between Europe and the United States.

Will the US dollar continue to press higher?

Although the US dollar (USD) has been subject to some selling pressure over the Bank Holiday weekend, expectations for a robust economic rebound in the US could open the door to further gains for the greenback.

After opening above the USD 1.39 level, the British pound to US dollar (GBP/USD) exchange rate is trading 0.3% lower heading into the North American session at USD 1.3858.

The greenback continues to be supported by US economic data, which has surpassed expectations and paved the way for the US to undergo a faster recovery than other leading economies.

The seasonally adjusted final IHS Markit US Services PMI revealed that activity in the sector jumped up 60.4 in March from 59.8 in February, beating consensus readings of 60 and highlighting the US economy’s strength.

However, the data also boosted FX market sentiment, which translated into gains for stocks and risk-on currencies such as the Australian Dollars and New Zealand dollars.

Analysts from TD Securities have also suggested that “while the US economy looks exceptional, COVID normalisation over time means the rest of the world will converge and there’s room for a USD pause.”

US President Joe Biden’s infrastructure plan could also weaken the US dollar (USD) as the expenditure boost will more than likely make investors less hesitant to take risks. As a result, risk-sensitive currencies such as pound Sterling (GBP) and the Australian dollar (AUD) should increase in appeal.

While the occasional pullback seems likely as mutant COVID strains will continue to be a cause for concern, the upward trend in riskier assets is expected to remain intact.

Australian dollar forms bearish pattern following RBA statement

The Australian dollar (AUD) has proven its resilience yet again on Tuesday and is trading higher against pound Sterling (GBP) despite the UK’s more optimistic outlook.

At the time of writing, the British pound to Australian dollar (GBP/AUD) exchange rate has slumped by 0.4% to AUD 1.8091, albeit weakness could be temporary as market analysts have attributed losses in GBP to profit-taking.

While GBP/AUD is trading off 2021 highs, the currency pair could find bullish traction over the coming weeks with the next phase of UK Prime Minister Boris Johnson’s reopening plans given the green light to go ahead.

Today, the Australian dollar (AUD) is being driven higher by the relatively upbeat tone from the Reserve Bank of Australia’s (RBA) and global vaccine data, ensuring FX market sentiment remains buoyant.

However, “Aussie” positioning is beginning to look slightly stretched amid inflation fears and unemployment concerns, which could dampen AUD performance.

While RBA policymakers were primarily upbeat, the central bank’s Governor, Philip Lowe, said an interest rate hike would not be considered until inflation and unemployment levels returned to their target bands.

The RBA’s target band for inflation is between 2-3%, and with inflation currently at 0.9% – there’s a significant way to go before this is achieved. Meanwhile, the unemployment rate at 5.8% would need to reach 4% or less – levels not seen since before the 2008 financial crisis.

Given that both Australian labour market data and inflation are far from targets, the RBA will more than likely maintain a cautious stance over the coming months, which could create scope for GBP/AUD to advance.

The British pound to Australian dollar (GBP/AUD) exchange rate has already gained by 1.81% year-to-date, and without any further support from the RBA, the currency pair could continue to trade near recent highs in the short term.